Preferred Shares Report - Raymond James Ltd.

Canadian Preferred Shares ReportApril 18, 2013 Page 7 of 10Appendix A: Yield TablesYields tables are included as a separate report/attachment, and are also availableon a daily basis from the Fixed Income Group of Raymond James Ltd.Appendix B: Credit Ratings ComparisonsDBRSPfd-1 (high)Pfd-1Pfd-1Pfd-1 (low)Pfd-1 (low)Pfd-2 (high)Pfd-2Pfd-2 (low)S&PP-1 (high)P-1P-1P-1 (low)P-1 (low)P-2 (high)P-2P-2 (low)S&P GlobalAAAAA AABBB BBBBBB-Pfd-3 (high)Pfd-3Pfd-3 (low)Pfd-4 (high)Pfd-4Pfd-4 (low)Pfd-5 (high)Pfd-5Pfd-5 (low)Pfd-5 (low)Pfd-5 (low)Pfd-5 (low)Pfd-5 (low)DP-3 (high)P-3P-3 (low)P-4 (high)P-4P-4 (low)P-5 (high)P-5P-5 (low)CCCCCDBB BBBBB BBCCC CCCCCCCCC CCDDescriptionSuperior: High quality with minimal credit risk. Such a rating is back by strong earnings and balancesheet.Satisfactory: Upper-medium grade and comes with moderate credit risk. There is substantial protectionof dividend and principal.Investment Grade Cut-OffAdequate: Medium grade and comes with moderate credit risk. There may be speculativecharacteristics.Speculative: substantial credit risk, and are speculative in nature. The protection of dividend andprincipal is uncertain, but especially so during times of economic adversity.Highly Speculative: Very high credit risk due to chance of default. The protection of dividend andprincipal is uncertain.In Arrears: The lowest rated class. Low prospect for recovery of principal and interest.

Canadian Preferred Shares ReportAppendix C: Education and GlossaryWhat are Preferred Shares?Preferred shares are equity securities that provide investors a fixed dividend whichmust be paid out before common share dividends are paid. Preferred shares havecharacteristics of both equity and debt instruments. The fixed dividend is stated bya coupon rate and is commonly paid out quarterly. In the event of a dissolution orliquidation of the issuer, preferred shareholders claims on assets are senior tocommon shareholders but behind debt holders.Preferred vs Common Like most common shares, these are equity instruments which pay dividends Potential for price appreciation but price is less volatile than common shares Not able to participate in the upside profits from ownership of the companyand usually have no voting rights unlike common sharesPreferreds vs Debt Securities React similarly to interest rates as bond instruments Many preferred shares are issued at a fixed par value Rated by the major credit rating agencies Redeemable for a set amount at the end of a fixed term Typically pay a fixed dividendWhat are the Benefits? Favourable tax treatment: Better after-tax return for preferred sharedistributions from Canadian corporations; preferred dividends are less heavilytaxed due to the dividend tax credit compared to interest which is fully taxableas income under Canadian federal and provincial legislation. Higher yield than other fixed income products: Preferreds tend to have higheryields than other fixed income products such as bonds since distributions areless assured. Yields are not guaranteed but many major public companies willmeet preferred share obligations even in times of losses. However, someissuers have the right to defer (or suspend) payment of dividends uponfinancial hardship. Price stability compared to common shares: Less volatility in price ofpreferreds.April 18, 2013 Page 8 of 10 Addresses reinvestment risk: available in longer terms unlike money marketproducts such as GICsWhat are the Drawbacks? Interest Rate Risk: Many preferreds pay a fixed rate distribution similar tofixed income securities; there is an inverse relationship between changes ininterest rates and the price of the preferred shares. Price sensitivity of thepreferreds is greater for longer terms and for lower coupon rates. Preferredsare less price sensitive to interest rate fluctuations than bonds. Call Risk: Callable preferreds tend to have higher yield to maturities given thecall risk. However, the call risk is a disadvantage to the investor for thefollowing reasons: future dividend income stream is uncertain, reinvestmentrisk for the investor since the issuer often exercises the call provision wheninterest rates have fallen in order to refinance at lower rates. Callable issuesare unlikely to appreciate in price when interest rates fall and possibly declinebelow the call price given a significant rise in rates. Credit Risk: Independent agencies such as the Dominion Bond Rating Service(DBRS), and Standard & Poor’s (S&P), assess an issuer's ability to fulfill itsobligations and assign a credit rating. A decline in credit quality can negativelyimpact the price of preferreds and the dividend policy of the issuer. Liquidity Risk: Preferreds often have light trading volumes, i.e. "thin" markets.This lack of liquidity can cause exaggerated swings in price when buy or sellvolumes pick up from normal levels.What to Look for in Buying Preferreds? Credit Quality: Higher quality preferreds provide higher assurance of adependable income stream. The price of preferred shares is likely to erodemuch more upon the issuer facing financial difficulty than from a shift in rates.High credit quality preferreds are rated P1 and P2 by DBRS. Yield to Call/Redemption: This is the yield shown to a call date or reset date. Liquidity: - Certain issuers are more easily purchased or sold on the marketdue to higher liquidity. The size of the initial preferred offering can influenceliquidity. In general, the larger the issuance size, the better the liquidity. Diversification: Selecting preferreds in different industries and with differentfeatures can help provide balance and flexibility to an investor.

Canadian Preferred Shares ReportTypes of Preferred SharesPreferreds can be structured in a variety of ways based on a combination offeatures related to the 1) term or maturity (fixed or no maturity date), 2) paymentprovision (fixed or floating rate), 3) dividend policy (cumulative or non-cumulative),and 4) other unique qualities. It is easy to see that there can be a number ofdifferent combinations of the different features for preferred shares which give theholder/issuer different rights. Therefore, prior to investing in preferred shares, it isimportant to understand the specific features of the particular preferred shareissuance. The following is a description of the different types of preferred shares.1. 2. 3. Term to MaturityPerpetual/straight preferreds have no fixed maturity date, the stated dividendrate is paid in perpetuity. Although the issuer does have redemption rights.(Hard) Retractable/term preferreds have a set maturity date at the time ofissue, the investor would get back his capital investment at the end of thespecified period.Soft Retractable preferreds pay out the retraction amount either as cash or anequivalent amount in common shares of the issuer, at the option of the issuer.Typically, the stock price used to calculate the number of common shares is95% of the average price of the common shares in a time period before theretraction occurs.Payment ProvisionFixed Rate preferreds have a fixed dividend at issue date, can be a fixed dollarvalue of a stated percentage of par value, normally paid quarterlyFloating Rate preferreds offer a floating dividend tied to a benchmark, typicallyas a percentage of the bank prime rateResettables pay a fixed dividend rate for a specified period, usually for fiveyears after their date of issue. On and after that date and on every fifthanniversary, if the issue is not redeemed by the issuer, the holder has theoption to either receive a floating-rate dividend, or exchange the series for afurther series of a fixed-rate preferred.Dividend PolicyCumulative means any missed dividends are accumulated and paid in fullbefore common dividends are paid or preferred shares are redeemed.Non-cumulative means dividends are paid only when declared and to do notaccumulate if missed. The trend in the marketplace has been issuances withnon-cumulative preferred shares.April 18, 2013 Page 9 of 104. Other FeaturesConvertible preferreds allow the holder to convert the preferreds into commonshares based on a specified conversion formula, there are not many of these inthe market nowadays. Redeemable or Callable features allow the issuer to reserve the right to redeemor “buy back” shares at a predetermined price after a specific date. A smallpremium above the par value per share is often paid as compensation to theinvestor when the shares are called. Non-callables, which are rare, cannot becalled or redeemed as long as the issuing company is in existence.There are a couple of other types of preferred shares which have characteristicswhich are quite different from conventional preferred shares and are describedbelow. Deferred Preferred Shares are non-dividend-paying preferred shares, similar tostrip bonds, the shares are redeemed at a set par value on a set date in thefuture. However, unlike strip bonds, the accrued dividends (the dividendpremium) on a deferred preferred share are not subject to yearly tax. Whenthe holder is an individual, such dividends do not qualify for the gross-up anddividend tax credit rules normally applicable to dividends received byindividuals from taxable Canadian corporations. If the preferred is held toredemption, the accrued dividends are fully taxable as interest income.Synthetic Preferreds (Split Shares, Structured, Equity Dividend Shares) arepreferreds where holders give up the right to all capital gains to commonshareholders while receiving all the dividends on the common shares. Thematurity values of such structured shares are dependent upon the value of theunderlying common. Another feature of many Split Shares is a possible earlyredemption date.

Canadian Preferred Shares ReportTax ConsequencesFor tax purposes, there is usually a disposition when preferred shares are redeemedor called. Here is a list of tax related terminology related to such an event. Deemed Dividend: The difference between the redemption price and theshares’ paid up capital Deemed Proceeds of Disposition: The deemed dividend deducted from theredemption price Adjusted Cost Base (ACB): This is generally the purchase price plus salescommissions Capital Gain/Loss on the Disposition: The amount the deemed proceeds ofdisposition exceeds (or is less than) the adjusted cost baseThe table below provides a few illustrative examples of the tax consequences uponredemption of preferred shares.April 18, 2013 Page 10 of 10Tax ConsequencesRedemptionRedemption Price EqualsPaid-up CapitalRedemption When Paid-UpCapital Is Less Than ParPurchase price above parvalue & Redemption at ParRedemption Price Above ParTax Consequence No deemed dividend Deemed proceeds of disposition is the paid-upcapital Can result in a significant deemed dividend Deemed proceeds of disposition well belowpar resulting in the realization of a significantcapital loss on the redemption Capital loss, can offset any capital gainsrealized in calendar year of redemption orcarry back 3 yrs or carried forward indefinitely Paid-up capital rarely greater than par, thus,this results in deemed dividend Deemed proceeds of disposition is the paid-upcapitalPlease note that the tax implications in the examples are for illustrative purposesonly, and should not be considered an interpretation of the Income Tax Act; nor dothey purport to constitute specific tax advice. Clients should seek independentadvice on tax-related matters from qualified professionals licensed to practice inthat area.DisclaimerAll opinions and recommendations reflect the judgment of the author or the Research Department of Raymond James Ltd. (RJL) or its affiliates at this date and are subject tochange. Neither RJL nor the author assumes any obligation to update this information. Information has been obtained from sources considered reliable but we do notguarantee that the foregoing report is accurate or complete. The author’s recommendations are primarily based on technical analysis and may or may not take into accountinformation contained in fundamental research reports published by RJL or its affiliates. The author’s primary objective is to provide timely communications in respect ofcurrent developments in the marketplace, and thus may not provide sufficient detail for investors to make a fully informed investment decision. Potential investors areencouraged to review RJL’s fundamental research because it may contain important disclosures, which for the sake of brevity are not contained herein, but should be takeninto consideration before making an investment decision. Potential investors should also consult their investment advisors prior to making any investment decisions to ensuresuitability for the individual investor.This report is intended for distribution only in those jurisdictions where RJL is registered as a securities dealer, and any redistribution of this report in any other jurisdiction isstrictly prohibited. RJL, its directors, officers, employees and agents may from time to time hold long or short positions in the securities mentioned herein and may engage intransactions contrary to the conclusions in this report. RJL may perform investment banking or other services for, or solicit investment banking business from, any companymentioned in this report. RJL is a member of Canadian Investors Protection Fund (CIPF).

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